Tax pointers for a first-time freelancer?
January 18, 2022 10:42 AM   Subscribe

My partner recently started doing freelance technical writing. We live in California, the person paying her lives in the US somewhere outside California. There are no other complicating factors. A few questions inside.

She will be paid in her own name. She knows she needs to tell the IRS about her income four times per year.

- What IRS form does she need to fill out for the person who is paying her?
- What IRS form does she need to fill out 4x annually?
- What forms does she need to fill out for California?
- Invoice forms have a field for tax. California likes to tax everything. Are there any California taxes she needs to include on her invoice?
- Is there anything else she should know?

YANMAccountant; we're also contacting accountants but want to get a head start on the basics.
posted by sibilatorix to Work & Money (5 answers total) 4 users marked this as a favorite
She will give a W-9 to the person paying her. (This tells the payee how to fill out her 1099 after the year ends.)

She doesn't report her income 4x a year, she'll make an estimated tax payment 4x a year. If she's a sole proprietor, the IRS form is 1040-ES and the CA form is 540-ES. It's just the personal information (name, address, SSN) and the amount of the payment. If she pays online, she doesn't need to fill this out.

There's no sales tax for services. If she's providing a product, she'll need to include sales tax.

She should track her business expenses.
posted by meemzi at 10:55 AM on January 18, 2022

Nolo is a good source for tax and legal guidance, written for a general audience. They have a book on Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Gig Workers of All Types ($28) which will answer your questions and many others, including ones you might not think to ask.
posted by Mr.Know-it-some at 11:14 AM on January 18, 2022 [4 favorites]

The one other piece is that she will need to fill out a Schedule C as part of her regular (1040) tax return. The Schedule C will list all of her income, expenses and calculate the net profit for her business. These numbers transfer to the first page of 1040 and get added to the income being taxed (by both IRS and California). In addition, the 1040 will include both the employee and employer's share of Social Security so she needs to allow for that when she is estimating how much her taxes will be.
posted by metahawk at 11:15 AM on January 18, 2022 [1 favorite]

If you're filing jointly I have no idea how to handle the estimated taxes and you should definitely talk to an accountant so I'm assuming you're filing separately. She will definitely want to hire a real accountant when it comes to filing taxes. It might be worth talking to one before the first estimated payment (April 15) to help work out a basic estimate for the year. She will probably have enough of an idea of estimated revenue by then.

Broadly, she will pay more taxes than she expects, and she should set her rate accordingly. For me it worked out that I pay roughly 1.5x the taxes as a freelancer that I did as an employee because my business expenses are very low (which is probably true for your partner as a tech writer). But this is very state and income bracket dependent, which is the part an accountant would help with. When it comes time to do the estimated taxes, I just made a spreadsheet where I took my quarterly income and estimated basic taxes on that. This is much easier to estimate the second year because you basically need to pay 25% of your total taxes for the last year to avoid the penalties.

She should start tracking her business income and expenses right now. This is easier if she has a separate business banking account, but it's not required. There are a lot of ways to do this, I made a separate business checking account at my primary bank and set up Wave to do my invoicing and accounting. They're free if you don't use their payment processing, but I have used it for a few clients who had trouble paying me via direct deposit or Zelle. You want to do anything you can to reduce your business profit on paper and many things are legal deductions that you may not think of as an employee

Health care is complicated, if she can use your health care it's probably a good idea. If she has a ACA health care plan in her name she can deduct those premiums as a very significant tax deduction, but you cannot do this with COBRA (it's technically in the name of the old employer) which cost me a fair bit of extra taxes my first year freelancing.
posted by JZig at 11:17 AM on January 18, 2022

Have a look in advance at Schedule C’s expenses section, and the instructions for any which might be relevant. That way, she can keep track of those expenses as she goes along. Especially if she ends up using an accountant who shields her from the actual form and instructions, it can be easy to drift along without realizing that she’s got expenses that would reduce the taxes she’ll owe.

If she hits the limits for IRA contributions and wants to stash away more of her business income for retirement, there are options available to her to take the place of the 401k she’d otherwise have through an employer. There’s a solo 401k (also called by other names), a SEP IRA, or a SIMPLE IRA.
posted by daisyace at 2:48 PM on January 19, 2022

« Older My dog judges my rhymes   |   What could hetero dating culture learn from LGBTQ+... Newer »
This thread is closed to new comments.